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12-13-2018Article

Evaluation of the Act to Further Facilitate the Reorganization of Companies: Additional value through self-administration and insolvency plan

Advent Calendar 2018

The Act to Further Facilitate the Reorganization of Companies entered into force on March 1, 2012. The Act amended the German Insolvency Code. It introduced protective shield proceedings, and reformed self-administration as well as insolvency plan. In 2017, after five years of practical experience with the legal innovations, the German Federal Government has had the Act to Further Facilitate the Reorganization of Companies evaluated. The respective evaluation report is available since October 10, 2018. 

The most important result of the evaluation is that the innovations introduced by the Act to Further Facilitate the Reorganization of Companies have essentially proven to be worthwile in practice. A return to the legal situation prior to March 1, 2012 is not desired. The findings of the report will probably - after scientific opinions and political discussion - lead to some adjustments in protective shielding proceedings and self-administration. As a result, there will likely be fewer self-administration procedures in future, but those will then be better prepared and accompanied. 

The report recommends increasing the conditions for access to (provisional) self-administration. Unsuitable procedures should be excluded from the beginning. In addition, the protective shield procedings (Section 270b German Insolvency Code) and the provisional self-administration procedure (Section 270a Insolvency Code) could be merged by amending the law. 

Skeptical evaluations of the Act to Further Facilitate the Reorganization of Companies address the fact that provisional self administration procedures were also ordered for debtors which were not suitable. For this reason, debtors' “self-administration worthiness” should be examined in the future. The legislator should lay down minimum requirements such as plausible reorganization concepts in addition to liquidity planning, the support of major creditors and stakeholders in advance, and the assurance of insolvency law expertise. Obvious breaches of accounting and reporting obligations, manifest violations of the obligation to file for insolvency, and any arrears in social security contributions or taxes should speak against “self-administration worthiness.” In cases in which the situation is not clear, there should be no self-administration. The options of canceling self-administration are also to be simplified in the future. Further proposed corrections only relate to individual issues. 

A majority believes that the Act to Further Facilitate the Reorganization of Companies is an important milestone for a positive change in the insolvency culture, moving away from the credo of failure and towards a constructive new beginning. In particular, the insolvency plan procedure is generally working well. According to the evaluation results, the improved collaboration of reorganizers with the insolvency courts is also viewed positively. 

In summary: The Act to Further Facilitate the Reorganization of Companies was a sound construction and the right thing to do. Its reforms, which have meanwhile proven their worth over 6 years of practical experience, will be retained in reorganization practice. Expected adjustments, in particular with a certain aptitude control through admission requirements for self-administration, would be welcomed. These will not change the fact that Germany has a modern and competitive law for reorganization in insolvency, which will be supplemented by extra-insolvency reorganization proceedings in accordance with the requirements of the expected EU Directive in the future. 

Your contacts are the experts of our Restructuring Practice Group. Prof. Dr. Georg Streit and Dr. Fabian Bürk and their team specialize in Reorganization, Corporate Law, M&A, and Litigation.

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